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The nationalised Hypo Alpe Adria Bank has stopped paying interest for bonds that are part of about €800 million in subordinated debt.

The new law that wipes out some Hypo Alpe Adria creditors went into effect on Thursday, overriding guarantees from the nationalised bank's home province of Carinthia.

Ratings agencies have said that the law was setting a dangerous precedent. Supporters believe that the law will ensure that investors in Hypo, including bondholders - not just taxpayers - help to shoulder the financial burden of winding down a bank that has burned through €5.5 billion in public aid so far.

Moreover it could drive up borrowing costs for other state-backed firms, including utilities and health agencies. Hypo's costs will push state debt to 80 percent of gross domestic product this year.

However, it was expected that creditors would sue. The creditors and several lawyers said the law would be expropriation at their expense.

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